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Ruling

Subject: a bed and breakfast venture

Question

Will the bed and breakfast (B&B) you plan to operate constitute carrying on a business for the purposes of the income tax legislation?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You have a room at your home that you are not currently using.

You are considering using it as a one room B&B.

Even though the B&B would be available during the week, you anticipate that most guests would stay on weekends.

You have projected the maximum income you could generate from the B&B each year.

Realistically, you expect the B&B would earn less than half of this each year.

This income would not be your main source of earnings as you work full-time.

You would not employ anyone to assist in the running of the B&B.

You decided to use the room as a B&B as it is currently unoccupied.

You believe that since the property is located in a country setting that it would make a good location for a B&B.

Initially you believed the B&B might assist in paying your rates; however your calculations indicate that it will not be profitable.

You have included a profit and loss statement which indicates a profit, assuming maximum income is generated by the B&B.

Your profit and loss statement indicates you will use an online booking service to advertise your B&B.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5 and

Income Tax Assessment Act 1997 section 995-1.

Reasons for decision

Summary

Based on the information you have provided we do not consider that the activity has the necessary characteristics of a business for taxation purposes. Therefore, any money earned from the activity is not assessable income and you are not entitled to deduct expenses incurred in earning these amounts.

Detailed reasoning

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income according to ordinary concepts. This ordinary income includes amongst other things, income from salary and wages and business operations.

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

The case of Evans v. Federal Commissioner of Taxation 89 ACT 4540; (1989) 20 ATR 922 stated that whether or not an activity amounts to carrying on business for taxation purposes is a question of fact. There is no exhaustive or determinative definition which can be applied to determine this matter. Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548, however, provides that the test for determining whether or not a business is being carried on is both subjective, which considers the individuals purpose at the relevant time, and objective, which considers the nature and extent of the activities undertaken.

Taxation Ruling TR 97/11 provides the Commissioner's view of the factors that are considered important in determining if you are in business for tax purposes. The factors are:

· whether the activity has a significant commercial purpose or character

· whether the taxpayer has more than just an intention to engage in business

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

· whether there is regularity and repetition of the activity

· whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

· whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

· the size, scale and permanency of the activity

· whether the activity is better described as a hobby, a form of recreation or sporting activity.

No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression gained.

In your case, you have decided to utilise the flat on the back of your home as a one room B&B. This decision has been made as your home is located in the country and the flat is unoccupied.

This activity will be conducted on a small scale as you only have one room available for guests and your advertising is limited to an online booking service. You do not intend to hire any employees to assist with the B&B. Also, your main source of income is from your full time employment.

Although your profit and loss statement indicates an expected profit, this is based on the property being occupied every weekend during the year. You do not believe that this will be the case and you only expect to generate less than half of this each year from the B&B. You have stated that when running costs are considered, the B&B is not a viable business. Therefore we do not consider you have a purpose or prospect of profit from the B&B.

Based on the information you have provided, we do not consider that the activity has the necessary characteristics of a business for taxation purposes. Therefore, any amounts you receive in relation to this activity will not be assessable under subsection 6-5(1) of the ITAA 1997 as ordinary income and you are not entitled to deduct expenses incurred in earning these amounts.

Additional Information

Although your activity has not been described as a business, this can change over time as your level of activity changes. Therefore you should evaluate your level of activity on a regular basis to determine whether or not you are carrying on a business.